LLC Taxed As C Corp: Everything You Need to Know
An LLC taxed as a C-corp may be beneficial, depending on your particular business and how you'd like to gain capital for it. Your LLC will not be a corporation, but you can choose to have it taxed as a corporation for certain reasons.3 min read
An LLC taxed as a C-corp may be beneficial, depending on your particular business and how you'd like to gain capital for it. Your LLC will not be a corporation, but you can choose to have it taxed as a corporation for certain reasons.
Electing to Have Your LLC Taxed as a Corporation
LLCs are relatively new business structures in the U.S. They're the most flexible in terms of taxes. If you've formed an LLC, you can't treat it as a C-corp, unless you go through the legal process of making it a corporate entity. The IRS will allow you to file as a C-corp for tax purposes, but you have to comply with income tax rules that pertain to C-corps for a minimum amount of time.
There are different ways an LLC can approach taxes in order to save money for the company and its owner(s). If you're an LLC owner, you can choose to be taxed as a corporation instead of as a sole proprietorship or partnership.
Your LLC is taxed by default in one of the two following ways:
- As a single-owner/member LLC, which is taxed as a sole proprietorship, using Schedule C of your personal tax return
- As a multiowner/member LLC, which is taxed like a partnership, using Form 1065, with each partner filing a Schedule K-1
How it's taxed depends on the number of owners, also known as members.
If you choose for your business to be treated as a corporation for tax purposes only, you need to be aware of the following:
- You make the election on Form 8832, via the IRS.
- You can file the form only if you're an eligible entity.
- An LLC elects this to be an association, meaning it's eligible to be taxed as a corporation.
- You include a statement of consent with your form, which can be signed by one member (acting as all members, with their prior, recorded approval) or all members.
- You have to include the name(s) and ID number(s) of each owner/member; this means the employer ID for a multiowner/member LLC or the Social Security number for a one-owner company.
Reasons to Elect for C-Corp Taxation
Pension funds are used to fund many venture capitals. The Internal Revenue Code makes it hard for pension funds to invest into entities that are taxed as partnerships if they carry on an active business. If your eventual goal is to get private equity money or venture capital, you should elect to be treated as a C-corp for tax purposes.
If you're the owner of an LLC that's taxed as a partnership, you can't be an employee of your company. You'll get a K-1 at the end of the tax year, not a W-2. For partnerships, you can't file your own taxes until you receive a K-1 from your company. In addition, the company has to first complete its partnership tax return before you can complete your K-1. Depending on how complex your company structure is, this can take some time.
If you're an employee of your company, you'll simply need your W-2 to file your taxes. If you get dividends, you'll also need a 1099-DIV.
Owners of S-corps and partnerships are limited in the amount they're allowed to deduct for the following benefits:
- Life insurance
- Child care
- Retirement plans
C-corp owners don't have these same limitations.
If you want a simple business management structure, you can first create an LLC and then file Form 8832, which elects C-corp taxation for an LLC. If you're an active owner in a C-corp, you're considered to be an owner as well as an employee. You can then treat the compensation you receive as wages instead of dividends, so your compensation will only be taxed once instead of twice.
Most business owners are looking for ways to save money, and this includes the amount of taxes they pay. If the pros outweigh the cons in being taxed as a C-corp (without all the legal complexities that come along with operating as a corporation), you might consider it for your LLC.
If you need help with taxes related to LLCs, C-corps, or other business structures, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.